Informal care of the elderly by their adult children is a common form of long-term care, is often preferred by the elderly to formal care, and can reduce Medicare expenditures if it substitutes for formal care. While we know a great deal about informal caregivers, only recently have researchers quantified that informal care is a net substitute for long-term care. Little is known about how informal care affects Medicare expenditures, yet concerns about the solvency of the Medicare trust fund are escalating. Current projections by the Medicare Trustees show that the Medicare trust fund will be depleted in the year 2029 (CMS, 2001). This proposed study will determine whether the reductions in formal care from informal care lead to reductions in Medicare expenditures for home health, skilled nursing, and hospital use. Data uniquely suited to address questions of informal care and Medicare expenditures will be analyzed. The data are Medicare Claims merged with the Asset and Health Dynamics Among the Oldest-Old panel survey. The long panel data period (1992-2000) allows for a rich view of informal and formal care behavior for a nationally representative sample of adults age 70 and above, and requires use of longitudinal data analysis methods. In addition, the endogeneity of informal care in predicting expenditures requires the use of simultaneous equations methods. Instrumental variables (IV) estimation will be used to control for endogeneity, using child-level identifying instruments that have been used and validated in numerous studies. Two-part expenditure models will be used to model the expenditure behavior of the elderly for home health, skilled nursing, and hospital use. Informal care is important because it is the first line of defense for older adults who have faced a loss of independence. Ultimately informal care a effects the health status of the frail elderly, their ability to live independently, and expenditures on health care. Finding a relationship between informal care and Medicare expenditures would provide a strong impetus to examine Medicaid expenditures, would signal policymakers to include informal care supply changes in Medicare Trust fund projections, and would begin to inform the policy process about the cost-effectiveness of caregiver policies.